Uranium Update: Still a Glowing Opportunity?

Is uranium poised for another big bounce? Adam Rodman of Segra Capital Management returns to follow up on his tremendously popular Real Vision interview from late 2017, and to review the key drivers of this most unusual commodity. Rodman explains the big picture, then dives down into the nuances of both the supply and demand sides of the market. Filmed on January 3, 2019 in Dallas.

Comments

I was up 4 fold on my uranium speculations I bought in 2009 on companies like Dennison until Fukushima happened. I believe all of my gains were wiped out in at most a week because of the sheer panic that Fukushima caused. There's a lot of warnings out there on other older Japanese nuclear power plants too besides Fukushima. A lot of corners were cut on those plants. American engineers warned the Japanese companies decades ago like TEPCO. From what I have gathered, TEPCO knew for many years in advance that their backup electrical systems were not separately wired from their main systems and there were other safety problems. Cutting corners, especially with nuclear power plants, just to save a few bucks is one of the worst ideas imaginable...

There are 3 main things that can stop the uranium trade from working well and delaying a much higher uranium price in my opinion. 1) We have a similar to 2008 global financial crisis and either central banks wait for 12 months or longer to change the rules and do further intervention/QE or 2) There's another Fukushima type event with an operating nuclear power plant or 3) China continues to delay bringing online their dozens of nuclear power plants for years longer or suspends them indefinitely. In the China scenario, the uranium price is below replacement levels for miners so the price would probably still eventually go higher just not as much as a catalyst for higher and higher prices with the increased demand from dozens of new operating nuclear power plants.

I read a few news stories recently stating that scientists had developed a way to extract uranium from seawater. It seemed cheaper and easier than mining, and there is a ton of seawater available.
Wouldn't this technology kill the mining space once it comes online?

Adam delivers a compelling story , but I don't think any of these are novel ideas. Please refer to Kazamtomprof's IPO roadshow deck, Uranium Participation Corp IR decks and Cameco IR decks. Cameco basically says they'll be buying spot 10-12mm lbs to deliver on their contracts. All these points are clearly laid out.
My preliminary digging around Exelon, which is the largest Nuclear operator in the US is that they have contract supplying them with fuel until 2022. With the shutdowns happening in the US over the next few years, the fuel contracts for some of the reactors will be repurposed to working reactors, which may push out this "recontracting date". I think the political environment and mobilization required for the US nuclear industry will deter nuclear growth here. I obviously understand strong demand out of China, but there has been so many history of failed greenfield projects in the western nations because of incredible cost over-runs which could happen to China new builds.
Other interesting points, from the KAP IPO roadshow deck is 1) a good portion of large players are still operating at cost below spot, 2) KAP does not supply US and 3) Cameco is contracted out at high prices and 4) there seems to be a good floor demand from non-utility demand for yellow.
And then lastly, regarding short put strategy on U-T struck at NAV. This thing will rarely trade at NAV unless a squeeze happens, there are friction costs to U-T which warrants a discount to NAV. Same for Yellow Cake plc.

Great points. One thing to consider about the U.S. is that though Exelon has fuel supply through 2022, they likely will need to contract for U3O8 before then. My understanding is that the process of extracting U from the ground to becoming a fuel source is about an 18-24 month process, so I would expect them to enter the market to purchase sooner than 2022

Would welcome anyone's view, from an Australian perspective, vis-a-vis Paladin Energy (which seems to be the best pure play miner in the space which is accessible to AU investors? Mindful they experienced some rock n roll in 2017/2018 but do not have a frame of reference as to how they are positioned in light of AR's investment thesis..?

From AR 2018:
"Unhedged, pure-play exposure to uranium."
that's what you want out of a producer to leverage the thesis. Then I guess you also want this company to survive in the interim ;) In the case of paladin, they have PIK notes and access to capital markets.

Comments below caused me to want look further at some of my assumptions (thanks to all!) and I just listened to an interesting discussion between Mike Alkin (who provided a mining perspective) and Andrea Jennetta (who comes from a nuclear industry perspective) in one of Mike's excellent podcast episodes.
They delved into a lot of stuff, such as how the miners got into the predicament they are in by over producing into a declining price environment, Fukushima, how the miners need a certain price to sustain operations, how Kazakh-Uzbek-Russian supplies can meet up to perhaps 50 percent of the required uranium for the US ... but, is that a good idea? Is it reasonable for US companies, with section 232, to ask for 25 percent guarantee (which they have never been able to supply and won't for some time).
Anyway, the bottom line that I came to is that this is going to play out over the next few years and any return on investments (other than the covered call strategy that Patrick S. suggests below) will require a little patience.
If interested, check out the interview here:
http://themikealkinshow.curzioresearch.libsynpro.com/a-nuclear-meeting-of-the-minds-ep-37
It was good to get a balance of views and thanks to all for your comments.

Nice piece thanks, the elephant in the room which was touched on is the Kazakh and Russian (de-weaponisation) supply that will flood the market. Surely if any US president is likely to do a deal with Russia its the one they placed in power? 🤔

The 232 investigation was opened in mid July of 2018. The proposal for a solution will come within 9 months - no later than mid of April. Then the president will have 90 days to decide. We are less than 6 months away. This is such a great entry point as Nov and Dec saw such a large decline in equity prices.

Daniel,
Is this your opinion, or is this standard operating procedure regarding these types of things? Is there info I can read regarding the resolution timeline anywhere?
I hope my written text doesn't come across as rude. I'm a uranium bull, and I actually asked this question earlier down in the comment section. Just genuinely would like to know, and I'm clearly hoping you are right.

First of all thanks Adam, its great to see someone of your stature creating such a strong thesis. I enjoy when you are on RV everytime.
But before we get uber bullish I would like to present a few things that I see as potential headwinds:
Strong dollar, slowing globally especially in China, continuing selling of spot onto market from refiners, continued weapons denuclearization with that material being dropped onto market, Kazakhs still producing more than they are leading the market to believe keeping spot artificially low to force competition to shutter. Continued dilution from miners to keep business a float, Significant Japan restarts lagging. Continued Uranium contracts purchased from Russia instead of US producers. Putin, continues to exhibit a bizarre hold over this administration.
I think Adam is correct, its all in the timing. Although if the market goes into full bear which trader Vic has spoken about later this year, most miners may be cut even deeper from current levels. Do your homework, invest in safe jurisdictions, and scale in and have a long time horizon.

1) Kazakhs still producing more than they are leading the market to believe keeping spot artificially low to force competition to shutter. (Perhaps, but not in their best interests after Kazatomprom IPO?),
2) Significant Japan restarts lagging. (More than offset by number of new reactors coming online and planned ... not to mention reactors whose lives are being extended and those whose existing capacities are being increased in order to satisfy demand).
3) Continued Uranium contracts purchased from Russia instead of US producers. (Uranium is listed as a critical element and odds are in favor that section 232 will recognize need to source locally).
4) Do your homework, invest in safe jurisdictions, and scale in and have a long time horizon. (Athabasca region in Canada is considered the Saudi Arabia of uranium, so these are probably safest companies for US investors).
5) have a long time horizon. (Uranium miners may experience a run-up like precious metals miners did in 2016, so it might be good to take profits if the miners explode and then plan for a re-entry, should there be a retracement ... just a thought).

Oops ... neglected your first observation, Douglas (please let me know what you think of my replies, if any are flaky in your opinion):
0) Strong dollar, slowing globally especially in China, continuing selling of spot onto market from refiners, continued weapons denuclearization with that material being dropped onto market. (The dollar won't matter, in my thinking, since the demand is fixed and the cost to produce is fixed and so the supply and demand will be the most important factor; Also, the "Megatons to Megawatts Program" to supply uranium from warheads successfully completed in 2013 (per Wikipedia) ... I am not aware of any other programs in effect currently that is providing uranium supply [would love to hear if anyone else knows]; Lastly, the demand from reactors should not be affected by economic cycles ... they need a certain amount of pounds per year to operate ... it's a fixed thing and not cyclical [at least so far as I understand]).

China is bullish China is bullish.... Yeah maybe but since 2016 there hasnt been one reactor approved or moving ahead. How is that top priority? Comparitively renewables and gas really picking up... people under estimate still that in the pecking order of things nuclear rightly or wrongly comes after renewables and other sources in governments mind

Aside from the opportunity which still sounds interesting, what I love about this style of idea it’s based on solid and very thorough principals and Adam has clearly talked to a lot of people to understand what is really driving the price. This is the type of thing I personally want from real vision. More than anything, it teaches you how to think as opposed to what to think.

also anyone interested in this sector should keep an eye on https://www.uxc.com/p/prices/UxCPrices.aspx , if you see SWU pricing continue to rise faster than the underlying , underfeeding or "recycling" waste into natural U will go down substantially which is the equivalent of several large mines being shut down. Remember U3O8 --> conversion --> enrichment --> fabrication - the bottle neck are the 2 middle ones. Nuclear long term fuel contracts = 6-7 reload cycles which for average operating plant is 2 years so 11-15 year supply contracts are the norm. The ETF URA is shit as it has 50% names that have nothing to do with uranium mining like engineering firms. so you are left with really a few names that you can play like Cameco, the only large producer you can bet on, also owns a large part of conversion market, kind of like the saudi aramco of the space (the other being KAP on the LSE which would be the largest in the world), Uranium participation corp - the uranium equivalent of GLD, NXE which is probably the next large scale project that will go into production but not for 10 years+, Denison mines same story as NXE 10 year+ timeline, and then a hand full of very tiny small names relatively speaking to the ones i just mentioned.

@liam J that ETF is full of engineering companies. The only way to play in north america is buy a basket of Cameco, UPC, NXE, EFR, Denison - Putting more $ based on market cap so really mostly in Cameco, and then if you really want to be a degenerate gambler a very small name like goviex or some other highly spec name. But even in the list of those 5 I gave you Nexgen and Denison would be highly speculative as they are at least 10 years away from seeing the light of day as projects due to the regulatory and environmental assessment process in Canada. If you can option overlay to lower your Cost basis with Cameco and you know how to do it then do it as no one knows when this "uranium" bull will happen plus there is a risk of market tanking in general which will take everything down with it.

Another funny trade if you are on TSX... selling IN THE MONEY uranium participation $5 puts maybe 2-3 months out (currently at 4.70) so 6.3% lower, when NAV is ~15% discount based on current prices, almost guaranteed trade as Cameco will be buying 15-16mmlbs at least this year. Free premium .

CCJ and sell covered calls against it far enough that you are comfortable with and won't get executed , have been doing this for 4 years my cost basis is negative JHAHAHAHAHAHHAHAH but seriously people it is the walmart of the sector trading at penny stock valuation, no brainer and owns 25% of global UF6 conversion capacity which is the bottle neck

there is a uranium etf (global x uranium etf) ticker URA. i have no idea if that's the way to play this tho. I would actually like to know as well what the best options for this potential highly lucrative trade are.

Decide vehicle based on:
Cash available, timing constraints is opaque
Geopolitcs... not only P232...projects in Africa is the safety valve for China... AND all Kaz products ships through China...
Position in cost curve vs Contracting... NXE/DML etc is controlled by strong hands that allow them to hold off contacting early in the bull move...

URA is no longer the diversified way to play this for reasons covered elsewhere in these comments. It may be worth taking a look at LSE-listed Geiger Counter (GCL). A CEIC operating in the Uranium mining sector.

URA is no longer the diversified way to play this for reasons covered elsewhere in these comments. It may be worth taking a look at LSE-listed Geiger Counter (GCL). A CEIC operating in the Uranium mining sector.

In all the years I've been following commodities, the thing that happens consistently at the start of a bull market is we see the equities acting well even while the commodity price may not be showing strength. The opposite is happening here. I am long the sector, so I want to believe the weirdness within the uranium market is causing this. The question I have is if a contract price is established in 2019, at what price would that contract have to be struck for the stocks to start acting well?

Who knows the intro music artist? I would like to find out if they have other cool stuff. BUT otherwise, I love RealVision. These talks are so challenging to the mind and they break down preconceived notions so well.

I say this as someone who has been following(and investing) in this theme for a while now, it seems like such an obvious and asymmetric trade opportunity, with a huge 'margin of safety' as Adam says. What are we missing? I have yet to hear a well reasoned rebuttal to the thesis, aside from possibly a macro argument (global meltdown, strong dollar, etc.), but even that is just an argument for not now, not an argument for not ever.
As other say, comfortable in holding my position and adding, but looking for well reasoned challenges to the thesis!

As far as China - they cant breathe. Remember regardless of your economic status everyone breathes the same air. For China nuclear power generation is a priority and they are acting accordingly in terms of their nuclear plant buildout. The only black swan I can see at this point would be another nuclear plant accident through an act of God or heavens forbid from terrorists. Barring that outlier the die is cast and I am reasonably invested although no one knows how long the piece of string is. There are strong reasons to believe the utilities will be in there in a strong way in 2020 but it may be sooner. Clearly 232 has put things in a stall pattern.

Shameful he does not mention that the uptick in uranium prices is already priced into models (ie it is a consensus view at least among the sellside). That is a key reason the equities have underperformed the underlying.

Commodity-driven equities discount commodity prices. Cameco and other uranium equities already discount a high future uranium price. So its move up should have a limited effect on the equities. This is what we’ve seen. Yet this was not mentioned as a bear case even though it is commonly cited by the sellside as the main one. Do you think analysts at research houses are so stupid they haven’t forecast an increase in uranium prices in the price decks? They have.

Not sure why analysts at research houses need to be "that" smart to factor in future developments that might affect the uranium price. Isn't that the point of all research houses,.... to look to the future? Feels like Uranium has a strong future but it might take a few years to really see a strong price rise and so perhaps a CCJ price taking off.

Great update, Adam. This is one of those rare stories in the investment world where you can take a position and just wait as the long cycle turns in your favour. An easy sleep at night position, in my opinion.